2005 (9) TMI 683 - AT - SEBI

Summary

Issues Involved:

1. Whether the appellant violated SEBI regulations by accepting third-party cheques.
2. Whether the appellant failed to properly verify the client's details.
3. Whether the appellant allowed trades exceeding the client's declared income.
4. Whether the penalty imposed by SEBI was appropriate.

Issue-wise Detailed Analysis:

1. Violation of SEBI regulations by accepting third-party cheques:

The appellant was accused of accepting cheques from M/s. Vijay Growth Financial Services Ltd. (VGFL) for transactions made by Mr. B. Jayaprakash. The appellant argued that the SEBI circular prohibiting third-party cheques came into effect in August 2003, whereas the transactions in question occurred in May/June 2001. The Tribunal noted that the acceptance of third-party cheques was not prohibited at the time of the transactions, thus no violation of the laws or circulars occurred.

2. Failure to properly verify the client's details:

The appellant accepted Mr. Jayaprakash as a client without verifying his employer, VGFL. The SEBI investigation found that the appellant did not exercise due diligence, as the client registration form indicated only "service" under occupation without specifying the employer. The appellant contended that the form did not require employer details and was correctly filled. The Tribunal acknowledged that the form was compliant with SEBI requirements but emphasized the need for brokers to exercise caution and diligence.

3. Allowing trades exceeding the client's declared income:

Mr. Jayaprakash, with an annual income of Rs. 3 lakhs, was allowed to trade shares worth Rs. 6.19 lakhs. The appellant argued that SEBI regulations did not stipulate restrictions based on a client's income and that the client registration form was a self-declaration. The Tribunal noted that while no specific SEBI rule was violated, the appellant failed to exercise due diligence, as the significant discrepancy between the client's income and trading volume should have raised concerns.

4. Appropriateness of the penalty imposed by SEBI:

SEBI imposed a two-month suspension on the appellant's registration. The appellant cited precedents where similar violations resulted in warnings rather than suspensions. The Tribunal reviewed cases where brokers received warnings for comparable or more severe infractions. Considering the appellant's good track record and reputation, the Tribunal modified the penalty to a warning, emphasizing the need for vigilance without imposing a stigma that could impede the appellant's growth.

Conclusion:

The Tribunal concluded that while the appellant did not violate specific SEBI regulations, there was a lack of due diligence in handling the client's transactions. The penalty was reduced from suspension to a warning, taking into account the appellant's reputable standing and the nature of the infractions. No order as to costs was made.